We recently published our Counterpoint 2020 Mid-year Outlook against the backdrop of a global health crisis and an unprecedented economic contraction. Just as extreme was the monetary and fiscal policy response. These events, despite their unusual trigger (a pandemic), seem to follow the pattern of past cycles to a much greater extent than one may think at first sight. So historical analysis of what happened during prior recessions can help us shed some extra light on what’s likely to happen going forward – not just in the near future, but also over longer horizons.
First, the conditions that existed at the start of this year shared many characteristics that preceded other recessions: low unemployment, rising inflation, high market valuations, low volatility, confident consumers and an inverted yield curve, just to name a few. Of course, most of these late-cycle characteristics applied to the US. Europe, with less inflation and more spare capacity, was closer to a mid-cycle economy.
Second, the way the market bottomed in March relative to still deteriorating economic data was also similar to prior recessions – reflecting the forward-looking nature of financial markets, which tend to anticipate economic developments captured in lagging statistical releases.
Third, the way economic data is behaving looks relatively normal too. It takes six months for manufacturing activity, as measured by the US ISM index, to return to expansionary territory from the lows. Several past cycles have seen this happening within three or four months. The latest crisis turned out to be the sharpest and most likely shortest of all, taking just two months from the trough in the Institute for Supply Management (ISM) to get back to signal expansion, but the pattern appears rather common.
Sources: Quintet, ISM, FactSet
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Chief Economist & Macro Strategist
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